Issue
Does subsection 104-15(4) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to disregard the capital gain or loss from a CGT event B1, if the sale of a house under an instalment sale contract (commonly known as a 'rent-buy' agreement) does not proceed?
Decision
Yes. Subsection 104-15(4) of the ITAA 1997 will apply to disregard the capital gain or loss from the sale if the contract does not proceed.
Facts
A taxpayer enters into a contract to sell a house under an instalment sale agreement, commonly known as a 'rent - buy' agreement.
Under the agreement, the purchase price is due to be paid to the vendor over a period of 15 years in weekly instalments consisting of principal and interest components. Until the full purchase price is paid to the vendor, the title to the property will not transfer to the purchaser. During the contractual period, the purchaser occupies the property and is responsible for the outgoings associated with the property such as rates and insurance.
The agreement contains a default clause which states that if an instalment is paid more than 30 days late, or if the purchaser dies, becomes mentally ill or is declared bankrupt, the vendor is entitled to rescind the agreement and require the purchaser to surrender possession of the property to the vendor. The vendor is entitled to keep any monies paid to them up to the date of the default.
Reasons for decision
The sale of a house under a 'rent-buy' agreement results in a CGT event B1 occurring (see ATO Interpretative Decision ATO ID 2004/58). Under the arrangement, the purchaser obtains the use and enjoyment of the property, although title to the property will not pass until the final instalment is paid, or at an earlier time if the balance of the purchase price is paid in full. The vendor will make a capital gain if the proceeds from the agreement are more than the cost base of the property.
However under paragraph 104-15(4)(a) of the ITAA 1997, a capital gain or loss from a CGT event B1 will be disregarded if title in the asset does not pass to another entity at or before the end of the agreement.
When a default clause in a 'rent-buy' agreement is triggered, the contract is rescinded. Title to the property remains with the vendor and does not pass to the purchaser. Therefore the vendor can disregard any capital gain or loss from a 'rent-buy' agreement that has been terminated. Note: If a capital gain or loss from a CGT event B1 has been included in a return of income by a taxpayer in an earlier year subsection 170(10AA) of the Income Tax Assessment Act 1936 allows for an amendment of the assessment at any time.